On June 9, 2023, the Securities and Exchange Commission (SEC) approved the executive compensation recovery “clawback” listing standards proposed by the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq). With the SEC’s approval of the proposals, NYSE- and Nasdaq-listed issuers are now required to establish and enforce compensation recovery, or “clawback,” policies in compliance with Rule 10D-1 under the Securities Exchange Act of 1934, as amended, and the applicable listing standards by Friday, December 1, 2023.
As discussed in our previous Viewpoints advisory, Rule 10D-1 requires the national securities exchanges to adopt listing standards mandating all issuers to implement policies requiring clawback of incentive-based compensation paid to corporate executives when that compensation is based upon the issuer’s meeting misreported financials that later require an accounting restatement.
Both the NYSE and Nasdaq’s new listing standards closely align with the language of Rule 10D-1, including what constitutes incentive-based compensation. The NYSE’s relevant listing standards introduce two new sections – Sections 303A.14 (Erroneously Awarded Compensation) and 802.01F (Non-compliance with Section 303A.14) – to the NYSE Listing Company Manual. Nasdaq’s relevant listing standards introduce a new Rule 5608 (Recovery of Erroneously Awarded Compensation) and several other related rule amendments, including amendments to its Rule 5800 Series (Failure to Meet Listing Standards) and to its Listing Rules Series 5000.
The NYSE and Nasdaq have different rules if a listed issuer fails to meet the requirements of their listing standards. Also, Nasdaq has made it clear that equity awards that vest exclusively upon completion of a specified employment period, without any performance condition, and bonus awards that are discretionary or based on subjective goals or goals unrelated to financial reporting measures, do not constitute incentive-based compensation under the Nasdaq listing rules.
Consequences of Non-Compliance
- A NYSE-listed issuer that fails to adopt a compliant clawback policy within the required timeframe is required to provide written notification to NYSE and issue a press release disclosing the delinquency as well as reasons for the delay within five days after the NYSE notifies the issuer of the delinquency.
- The NYSE will engage with the issuer to address this non-compliance and rectify the situation and, subject to certain limitations in the new listing rules, the issuer will have a six-month period to regain compliance.
- If a NYSE-listed issuer fails to recover erroneously paid incentive-based compensation as required by its clawback policy “reasonably promptly” after the obligation is incurred or fails to disclose clawback information as mandated by US securities laws, the issuer’s listed securities will be immediately suspended from trading on the NYSE and NYSE will promptly initiate delisting procedures.
- A Nasdaq-listed issuer’s failure to adopt a compliant clawback policy, to disclose required clawback information, or to comply with its clawback policy provisions will subject the issuer to delisting under Nasdaq's existing delisting process, including a period of up to 180 days to regain compliance.
NYSE- and Nasdaq-listed issuers should take the following steps to ensure compliance with the new listing standards by December 1, 2023:
- Discuss the new listing standards with the entity’s board of directors, compensation committee, and audit committee to:
- identify executive officers that will be subject to the issuer’s clawback policy,
- explain the definition of “incentive-based compensation,”
- spell out the triggering events for a clawback, and
- discuss the calculation of the clawback amounts, particularly in cases where the incentive-based compensation subject to clawback is based on stock price or total shareholder return (TSR) and not directly calculated from the information in an accounting restatement.
- Determine whether to adopt a separate stand-alone clawback policy or revise existing clawback policies to incorporate the new requirements.
- Communicate the upcoming changes with executive officers who will be subject to the new or revised clawback policy(ies) and address any questions they may have.
- Review and revise existing incentive compensation arrangements and structures with the assistance of compensation consultants and your Mintz attorneys, including cash incentive plans, equity incentive plans, applicable award agreements, employment agreements with current and former executive officers, and performance metrics, especially those related to stock price and TSR, to the extent necessary, for compliance with the applicable listing standards.
- Involve relevant corporate departments, such as finance and audit, human resources, and legal, to discuss and establish procedures and practices that facilitate tracking of incentive-based compensation earned and received by executive officers. These departments should coordinate with each other in the event of an accounting restatement that triggers a clawback of incentive-based compensation.
- Review and amend, if necessary, the form of indemnification agreement used for executive officers and the issuer’s bylaws (or equivalent governing documents) to specify that an executive officer may not be indemnified for the loss of compensation under a compliant clawback policy.
- Review and revise the disclosure controls and procedures required regarding the issuer’s clawback policy.
- Ensure that the issuer’s compliant clawback policy is filed as an exhibit to Annual Reports on Form 10-K or Form 20-F, as applicable, beginning with the first annual report required to be filed after December 1, 2023.
For assistance drafting a compliant clawback policy(ies) or revising an existing policy and reviewing existing incentive compensation arrangements and structures, please contact the authors of this Viewpoints advisory or your regular counsel at Mintz.
 As discussed in our previous Viewpoints alert, in early June 2023, both the NYSE and Nasdaq submitted amendments to their respective proposed listing standards seeking to delay the effectiveness of the listing standards to October 2, 2023, resulting in a compliance date of December 1, 2023 (60 days after the effective date).